Federal tax law currently allows a tax credit for a portion of adoption expenses, for the purpose of encouraging adoption. A new report, however, says the IRS targeted 70 percent of all families claiming that adoption tax credit in 2012 for the onerous burden of a tax audit. A full 90 percent of such families faced some additional scrutiny of their returns. To put matters in perspective, only one percent of tax returns overall are selected for audits.
The data is reliable and the information was gathered by the IRS's own Taxpayer Advocate Service. The 70 percent of adopting families targeted for audits amounted to approximately 35,000 returns. The report states these actions caused "significant economic harm" to many families who are engaged in the commendable action of adopting a child."
The report also says the current IRS approach to dealing with refundable tax credits may also create problems for families eligible for a new tax credit available for health insurance costs. The refundable tax credit for adoption expenses was created in 1996.
In addition, the IRS audits of the returns of adopting families largely proved to be fruitless. In 2011, the IRS audits returns claiming a total of $668.1 million, but only found fault with $11 million, amounting to 1.5 percent. The maximum credit is $13,170 per child.
Among reforms advocated in the report are that the IRS should give examples of what it considers proper adoption credit documentation and allow electronic filing of tax returns with such documentation attached. It further suggests that a standardized third party affidavit form be created to verify an adopted child had special needs.
If you have an adopted child and need assistance with tax planning, contact an experienced attorney to help you navigate this complex area of the law.
Source: foxnews.com, "Nearly 70 percent of adoption credit claims were audited by IRS, report finds" Joshua Rhett Miller, May. 24, 2013